Sanjoy
Bhattacharya is a Bombay-based fund manager and one of India's foremost
securities analysts. He spoke with TIME Asia associate editor Aparisim
Ghosh recently. Excerpts from the interview:

TIME: Indian technology stocks have fallen in recent weeks. Did you
anticipate the fall? And do you think they will drop even further?
Bhattacharya: I don't think there were too many of us who foresaw
the magnitude of the fall. But now that people have come back to somewhat
more rational expectations of growth in the information technology sector,
the valuations of I.T. stocks are beginning to look more sensible. That
said, I believe that if you're a long-term buyer of the Indian I.T. story,
there is still absolutely no margin of safety. By long-term, I mean 2-3
years; there is no way to understand what would be the key drivers for
software services companies more than 3 years down the road. There will
probably be a bounce back [in I.T. stocks] as growth continues; many of
these companies will grow in excess of 100% over the next 12-18 months.
So I don't think a crash is imminent. But, unlike 3 years ago, this is
not the sector where big money is to be made. You aren't going to see
stocks multiplying 10 times, 20 times, 40 times. Last year, Infosys multiplied
9.5 times; this year, I don't see it gaining more than 80-90%.

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TIME:
For foreign fund managers, the tech sector is the place to be in India.
But in concentrating on that one area, are they missing out on good opportunities
elsewhere?
Bhattacharya: Undoubtedly. I think that realization has begun to take
root among some of the smarter and slightly more long-term oriented investors
abroad, particularly in the U.S. For instance, it came as a revelation
that Janus, which is one of the largest U.S. funds, had bought 5.6% of
[textiles giant] Reliance Industries--which has nothing to do with the
New Economy. There are world-class Indian companies outside the tech sector,
even if they are few and far between. For instance, Hindustan Lever is
an outstanding opportunity.

TIME:
Why?
Bhattacharya: There are two news angles to Lever. One is that they
are beginning to use the Internet as an alternative medium of distribution.
Second, they are tailoring the range of their existing line of products
by changing the packaging, pack sizesŠand repositioning these for the
affluent rural consumer. So, for the first time, the rural consumer is
getting to use not just bread-and-butter Lever products, like low-cost
detergents, but also premium products like face creams. Lever recognizes
that the urban market is saturated, that growth in that sector won't exceed
5%, so it is turning to the rural market, where there is growth potential.
To come back to your original question, Lever is a company that uses I.T.
well. As an investor looking for I.T.-related opportunities, you shouldn't
just look at I.T. companies--you have to buy the companies which benefit
the most by using I.T. In that sense, India is one of the best markets
in Asia. This is one of the few real economies in Asia outside of Korea
and Japan. The others are very concentrated economies, they're not real
economies. They haven't got the broad swathe of industrial activity that
India has. For instance, most Asian economies have no pharmaceutical sector
and no light engineering sector worth talking about. These sectors are
big users of I.T. If you can spot companies that use the Internet, applications
and software, there are great opportunities.

TIME: Are there examples of Indian companies using the Internet to
go global, to sell their products and services outside of India?
Bhattacharya: Visibly, not as yet. But I think there are a number
of people who are planning to do so. It will happen.

TIME: Over the past couple of years, technology stocks have propped
up the whole market. Now India faces a drought, which traditionally hurts
Old Economy stocks. Will technology stocks be hit too?
Bhattacharya: No. The fate of the Indian I.T. sector over the next
6 months will depend very significantly on the sentiment of investors
on NASDAQ, and on the ability of the frontline companies to meet the incredibly
ambitious expectations of institutional investors here in terms of growth.

TIME:
If you had to pick three winners for the next six months in the Indian stock
market, would you go for technology plays or non-technology stocks?
Bhattacharya: They'd all be non-technology stocks. [Motorcycle maker]
Hero Honda would be my first pick. This is a company that has been consistently
growing something like 30%, for the past three years. It has demonstrated
its ability in manufacturing terms, by launching products which are completely
state of the art for the Indian market--way, way ahead of anything the Indian
consumer would expect. It has upstaged Bajaj Auto, which was a dominant
market leader, in the span of 5-7 years. And it is an incredibly efficient
user of capital. The average return on capital employed for the past five
years has been in excess of 35%. This is truly impressive in the Indian
context. This company is trading at 11 times next year's projected earnings.
That's a throwaway price. It's selling for around $20. In my view, it should
be close to $33.

TIME: Your second pick?
Bhattacharya: It is a company that has a monopoly, has great earning
power and is vital to the ability of Indian companies to export in a competitive
way. It's called Container Corporation, and it's majority-owned by Indian
Railways. It is in the business of containerized transportation of goods,
and 80% of its business comes form exporters. By virtue of its ownership,
Indian Railways has a great stake in providing it the railway infrastructure--wagons,
engines and so on--so Container Corp. doesn't have to make significant capital
commitments, which it would need to do if it were a private-sector player.
It has zero debt.

TIME: What's the going price?
Bhattacharya: $3.30. The problem lies in the perception that people
have about public sector companies--Container Corp. is being tarred by that
brush. How long it will take for that sentiment to change is difficult to
say. We may well find, 12 months later, that it's still at $3.30 because
as long as that perception doesn't change, the PE multiple will not be re-rated.
Everyone knows that it is an incredibly strong company. The third company
would be Otis Elevators, which is a part of United Technologies Corp. in
the U.S. Here again is a dominant manufacturer, with more than 65% of the
elevator market. It has a huge base of installed elevators, which means
that even in lean years, the after-sales and service income makes it less
vulnerable to downturns. It has recently slashed its staff by around 35%,
so it is very lean. New players like Hitachi, Schindler and Mitsubishi have
had some success in the institutional market--hotels, commercial complexes
and so on--but Otis is not threatened in its stronghold, the residential
market. The company's other strength is its state-of-the-art Bangalore plant.
United Technologies is beginning to source some of its older-generation
designs for the whole of South Asia from this Bangalore factory. If Otis
is able to increase exports, a number of positive things will happen: it
will get tax breaks, it will become much less dependent on the Indian economy,
and it will become more cost-conscious in order to compete abroad.

TIME: And where is the stock now?
Bhattacharya: Around $6.70.

TIME: And where should it be?
Bhattacharya: I'd say $11.70. With luck, maybe $15.70.